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Pound Sterling softened against the Euro and Dollar after global equity markets fell in response to a strong U.S. inflation print.
GBP/EUR fell to 1.1979 (-0.25%) after a selloff in U.S. stocks confirmed global investor sentiment retains a powerful influence on FX market dynamics.
The U.S. reported above-consensus inflation, which spooked markets into betting the Federal Reserve now had limited room to cut interest rates much further.
With the sugar rush of lower interest rates off the table, equity markets are adjusting lower, confirming a more downbeat mood amongst investors.
To be sure, the bull market is firmly intact, but we are looking at a pullback that is impacting a manner of financial assets.
Included is Pound Sterling, which fell against the Euro and Dollar but rose against the risk-sensitive New Zealand and Australian Dollars in a classic risk-on/risk-off FX market dynamic.
The chart below shows how a fall in the S&P 500 stock index in the U.S. (lower panel) has dragged the GBPEUR exchange rate lower alongside:
America's BLS said inflation for all items rose 0.5% month-on-month in January from 0.4% in December, exceeding estimates for 0.3%. The rise pushed up the year-on-year rate to 3.0% from 2.9%, putting a full percentage point above the Federal Reserve's 2.0% target.
"U.S. inflation comes in far too hot," says James Knightley, Chief International Economist at ING Bank. "Potential tariffs add upside risk to inflation in coming quarters."
Money market pricing shows investors now expect just one interest rate cut from the Federal Reserve in 2025, and that won't come until December.
This suggests the odds of a cut happening at all in 2025 are receding rapidly.
Expectations for lower interest rates have been an important driver of equity market outperformance, which, as we have mentioned, underpins the Pound against the Euro and Dollar.
Market pullbacks have nevertheless tended to be shallow, even as these expectations have receded, so it would be premature to suggest a major turning point is underway for markets, which should ensure any associated GBP weakness proves short-lived.